Will the Eurozone or the EU break up under the strain of the financial crisis?

Family harmony is easy when times are good.   Breakdown threatens when money is short.  Jean Monnet knew this when he put economics ahead of politics in founding the EU. Fifty years of prosperity and peace have followed.  Now that the economy has turned sour will the rudimentary political framework of the Union hold?  Could the Eurozone break up?  Could one country walk out of the EU? Could there be a divorce?

In any extended family attitudes differ.  But even the best run do not prepare well for if dad loses his job.  When German export orders were cancelled it was a shock to the system.  Confidence  plummeted.  Other families are used to scraping by, borrowing too much and putting off difficult decisions.  Italy and Greece come to mind.  When the different parts of the extended family survey the scene, do they resolve to help each other?  The immediate answer is No: they look first to saving themselves.  Sauve qui peut!  Chacun pour soi! Protectionism is the first reaction.

While the structure of the EU does not make economic and fiscal coordination easy, there are several indications that the challenge to the eurozone is being tackled jointly by its members.  The European Central Bank for example has been having a good war.  It has not panicked like the Bank of England and the Federal Reserve in lowering interest rates virtually to zero.  The ECB has dropped them enough to encourage borrowing but not as far as to discourage lending and saving.  Eurosceptics like to believe that Ireland and Spain are frustrated with the ‘one size fits all’ interest rates of the Eurozone, but they themselves emphasise other causes of their difficulties and say there would be different difficulties if they were outside the zone.  While the German government has been criticised in the UK for not allocating Anglo-Saxon levels of bail-out money, their argument that they want to see how the first tranche works before committing more seems perfectly reasonable.  The German finance minister, Peer Steinbruck, has signalled that if any Eurozone country was in real difficulties then help would be forthcoming, despite the “no bail-out clause” in Article 103 of the EU’s governing treaty.  As a senior German diplomat said, it is the difference between theory and practice.    Another pragmatic move in the Eurozone has been to quietly forget the strictures of the Growth and Stability Pact while governments increase borrowing to deal with their problems.  A longer term answer is being seriously put forward with the proposal for a European Monetary Fund on the lines of the IMF.

While the Eurozone countries have not had the time, nor perhaps seen the need, to coordinate economic and financial policies in a formal manner hitherto, they have been meeting and discussing issues now for many years.  The language of economic stability is familiar; they have swapped experiences; relationships have been built up. Though the current strains are new, I think one can be optimistic that the framework for dealing with the situation is in place.

If for no other reason, the eurozone will hold together because no country can afford a divorce.  It is just as it is with most families under strain at the domestic level.  In the case of the Eurozone, any defection would seriously damage the credibility of the currency.  No one will let it happen.  The euro has been a great success, recognised around the world for its strength, second only to the dollar as a reserve currency.  It gives the full benefits of the common market to those inside the zone.  The eurozone will meet the challenge and speculators betting on defaults will lose money.  [revised 10.3.10]